Major rethink of CAP needed to correct imbalances and price volatility

Monday’s meeting of the European Farm Council was eagerly anticipated to deliver some form of reprieve for farmers across Europe who have been suffering as a result of the Russian embargo on food imports.

Here in Ireland, the embargo affected the dairy and pig meat industry rather than the fruit, vegetable and fresh food market difficulties experienced by many EU countries.

In response, the Commission on Monday put forward a package of measures to help address difficulties in cash flow faced by farmers, to stabilise markets, and to address the functioning of the supply chain.

The key measures include the advance issue of a higher portion of EU payments, to commence in October; the opening of private storage for both milk products and pig meat; and extra funding for promotion of dairy and pig meat products.

The total package is costing 500m, the division of this amongst member states, and across each sector, is yet to be finalised.

Although this package is undoubtedly welcome, it does seem rather scant when juxtaposed against the EU’s near 12 million farmers.

Indeed, advance issuing of Single Farm Payments and other payments is simply kicking the can further down the road, and does nothing for the cash flow pressures faced by pig farmers, who generally do not receive any Single Farm Payments in relation to their pig enterprise.

The rise in farm produce price volatility over recent years is correlated with the withdrawal by the EU of market supports, which seems to leave the various different segments of the EU’s farming industry continuing to drift from crisis to crisis, until someone grabs the proverbial tiller.

For dairy farmers, the lead-in time to milk production effectively means that they, more than almost any other sector, can do little to control production, in order to react to market conditions.

Many dairy farmers had engaged in extra breeding in 2013 and 2014 on foot of the signals at the time of high milk prices, and an almost insatiable demand for product from China.

Unfortunately, many of these heifers have come on stream in 2015, with yet more to follow for 2016.

The blunt truth is that the economic approach that each farmer takes at an individual level leads to a demise of the industry as a whole.

A dairy farmer suffering with low milk prices will try to produce more milk from his given resources, and the price achieved continues to reduce, as more product enters an already oversupplied market.

In economic circles, “Game Theory” is the term used to describe how participants can work together to achieve the optimal outcome.

In the context of the current dairy crisis, the root cause of low prices is over-supply.

Game theory would suggest that if all dairy farmers limited their production by a relatively small amount (say 3-4%), this would be enough to correct our current market imbalance.

This kind of controlling of the market is perhaps most familiar to us in the oil industry, by OPEC.

But, on a practical level, with free trade and an inability to control production in areas outside of Europe, it’s questionable whether such a reduction in production within the EU would address the global imbalance.

There are already calls from some quarters for the re-introduction of milk quotas, but such a policy initiative would not prevent implosions in the milk price achieved, we need only cast our minds back to 2009 to remind us of that.

Tools which can be rolled out quickly and effectively such as mandatory cow culling, export refunds, import tariffs, and supports to enable farmers change enterprise should be considered.

Meanwhile within the EU, the objectives of our Common Agricultural Policy should be re-examined.

The EU is more than self-sufficient when it comes to milk and milk products, while simultaneously being a net importer of rice, maize, sheepmeat, goat meat, and sugar.

Perhaps it’s time to rethink whether our broader EU CAP policy should focus on maintaining a level of self-sufficiency. In doing so, we can avoid shocks originating from foreign trade partners.


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